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Almost without exception, companies purchase physical assets to help them do business. Whether the purchases are relatively small such as computers and printers or large such as company cars and office buildings, these assets will go down in value over time. Reduction in value due to age is called depreciation. There is a difference between the physical life of an asset and the economic life of an asset. Physical life is the amount of time an asset will perform its function, i.e., how long will a building be standing and safe to occupy or a printer will turn out page of reasonable quality.
Economic life on the other hand refers to how long the asset will perform its function until it is rendered obsolete by wear and tear or falls so far behind the current technology that it's worth no more than what it could be sold for as scrap. According to the Modified Accelerated Cost Recovery System, an office building has an economic life of 39 years, while our computer or printer will have an economic life of five years. You can find more information about MACRS in IRS Publication 946, available on the IRS website.
At the end of an asset's economic life, it has what is called a salvage value. For example, if you have an old printer that you want to sell, you can either sell the printer at a substantial discount or have the technician pull out the usual parts and sell them to other repair shops that service the same model of printer. There are many different types of schedules that you can use to account for depreciation. Some of these techniques depreciate an asset more quickly than others. Why would you use an accelerated depreciation schedule? Perhaps because you expect to sell the building after using it for a few years.
Because you would hold on to the property for far less than its economic life, it would be to your advantage to capture the tax benefits of depreciation as soon as possible. Accountants have developed a wide variety of depreciation schedules for use by businesses. The schedules vary in the speed at which the assets are assumed to depreciate. Each approach has specific financial advantages and disadvantages.
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